Turkey crisis is about geopolitics

As Turkey’s currency gets battered, pundits in the western media have been holding forth on how the country brought the crisis upon itself. Turkey, we are told, kept its interest rates artificially low and facilitated a credit boom financed by foreign flows. This was a crisis waiting to happen.

The story is not as simple as that. True, the Turkish lira has been depreciating for a while. But the steep fall this month (of more than 25 per cent) has been triggered by political events: US sanctions early this month followed by more sanctions later.  

The provocation for the sanctions could not have been more contrived. The Turkish government had arrested an American evangelical preacher allegedly for indulging in anti-national activities. The American government demanded that he be released forthwith. Turkey refused. The US responded by sanctioning two ministers in the Turkish government. This meant their assets in the US would be frozen and no business or individual could deal with them financially. 

That’s hardly an earth-shaking event in economic terms. And yet it caused the Turkish lira to tumble. No doubt, the markets expected worse to follow as both governments dug in their heels. Sure enough, US President Donald Trump ordered a doubling of tariffs on imports of Turkish steel and aluminium. The lira took a deep dive.

In times of uncertainty, ‘contagion’ is the buzzword. Investors have no clue which banks are exposed to Turkey and to what extent. They have chosen to flee all emerging markets for now. Emerging market currencies, including India’s, are under pressure. We have the makings of another full-blown crisis.  

Washington couldn’t have failed to see this coming. It could surely have devised other ways to get the American pastor out. No, this is a crisis the Americans are perfectly okay with. It’s about teaching Turkey a lesson and sending a message to others.

Turkey has annoyed the US in many ways in recent months. It has announced that it will continue to import oil from Iran in the face of American sanctions. Although a member of Nato, it is going ahead with its order for an advanced air defence system from Russia. In Syria, it has attacked Syrian Kurds backed by the US. Turkey is now getting its comeuppance.

The bigger worry for analysts is the impact on China of an escalating emerging market crisis. Rising interest rates have already triggered a general flight to the dollar. The present crisis has bolstered the flight. Analysts fear that China could suffer a significant flight of capital if the crisis continues. Coming on top of the trade war the US has initiated, a flight of capital could create a major crisis for China. 

There is thus a message in the crisis also for China, which has been at odds with the US on issues such as Iran and the South China Sea. By engineering a crisis, the US is sending out a message to all recalcitrants: If you do not fall in line, we can bring you to your knees. In an era of globalisation, the world’s dependence on the dollar places it at the mercy of the US in ways that could not have been not foreseen.

S Gurumurthy at RBI 

Rupert Murdoch, the well-known media baron, once remarked that when he attempted to take over the Wall Street Journal, he faced criticism “normally reserved for a genocidal tyrant”. 

One was reminded of the remark on seeing the barrage of negative comments on the appointment of S Gurumurthy as a member of the board of directors of the RBI. The Financial Times spoke for many critics when it wrote, “A controversial right-wing commentator who is close to Narendra Modi, the Indian prime minister, has been appointed as a director at India’s central bank, prompting criticism that the government is interfering with the bank’s independence (August 8, 2018)”.  

Mr Gurumurthy can be said to belong to the right wing. His proximity to the PM is not in dispute. But the notion that his appointment is part of some sinister conspiracy to undermine the independence of the RBI is utterly laughable. 

The board of directors of the RBI enjoys all powers in respect of its functioning. In practice, however, it is unheard of for the board to overrule the governor or give directions to him. Besides, it is not as if Mr Gurumurthy can impose his views on the RBI -- he has nine other independent directors to contend with. 

One must also not underestimate the inherent strengths of the RBI as an institution. Successive governors at the RBI have established a strong tradition of independence. Many who were seen as the ‘government’s man’ have sorely disappointed the government. That is because, on a range of matters, the RBI has a well-researched position that governors have come to own.

That said, there are matters — inflation targeting, capital adequacy and provisioning requirements for banks, the resolution framework for stressed assets, etc — on which it is possible for reasonable people to differ with the RBI. We need a vigorous debate on these issues. That may not always happen. For obvious reasons, most members on the RBI board would be extremely circumspect in expressing themselves.

Mr Gurumurthy is unlikely to have such inhibitions. Thanks to his position in the Sangh parivar, his equation with the PM and his strong convictions, he is well placed to enliven the proceedings at the RBI board. That is only to be welcomed.. 

The writer is a professor at IIM-Ahmedabad 

ttr@iima.ac.in